Oscillator Indicator: Commodity Channel Index (CCI)
The Commodity Channel Index (CCI) is an indicator of the momentum of oscillation developed by Donald Lambert to identify cyclical changes in commodities but can also be used for securities (stocks) and bonds. CCI is a typical price comparison (TP) and a typical SMATP (SMATP) price differential and is expressed as an percentage of an oscillating that can exceed -100% and 100%. It can be used to predict price reversal, and to know overbought or oversold conditions.
Since CCI is based on the assumption that commodities, securities and bonds move in cycles, with the highest and lowest levels reached at periodic intervals, we recommend using a one-third (⅓) cycle from the entire cycle, low to low or high to high by timeframe for CCI. So, if it takes 60 periods to complete, then a 20-period CCI will be recommended. After you set the timeframe for CCI, you can calculate CCI in four steps:
First, calculate the last period of Typical Price (TP) ie (H + L + C) / 3 where H = highest level (high), L = lowest (low), and C = closing level.
Second, calculate Simple Moving Average of TP (SMATP) for CCI period which is 20 period for CCI 20 period.
Third, calculate the Mean Deviation which is the sum of the difference between the last period of SMATP and the typical price for each CCI period divided by the number of periods.
Finally, calculate CCI by using the formula:
CCI = (TP – SMATP) / (0.015 x Mean Deviation).
Lambert uses CCI to generate entry and exit signals respectively when CCI moves above + 100% and below -100%. When CCI moves above + 100%, pair or stock goes into a strong uptrend and an incoming signal will appear. When CCI moves back below + 100% this position should be closed.
Conversely, when CCI moves below -100%, the pair or stock enters a strong descending trend and the entry signal is given. When CCI moves back above -100% this position should be closed.